A Heritage of Trusted Medicines.

R & D

For more than 138 years, we have worked tirelessly to discover medicines that make life better. We bring this same determination to our work today, uniting our expertise with the creativity of research partners across the globe to keep finding ways to make life better.

Generic Medicines: The Gift of Innovation

Alex M. Azar II

October 14, 2008

Remarks at the Annual Mentor Dinner Harris School of Public Policy Studies University of Chicago

Thank you. It’s an honor to speak to this distinguished gathering of the Harris School of Public Policy Studies.

To the students here this evening, your chosen field of study could not be more timely. Whatever the outcome of the upcoming elections, our leaders will need to craft thoughtful policies to mitigate a range of very serious problems.

I have seen the value of well-developed, well-implemented public policy from both sides — in government and in the private sector. I am grateful for the commitment you’ve made to a rigorous academic program in public policy, and for your mentors’ generous contribution of time and expertise to your success and the success of this program.

As a fellow policy wonk, I’d like to discuss with you a policy challenge that’s very dear to my heart, and vital to all of us — the health and health care of Americans.

The signs are all around us that health care is headed for decisive change, and we all have an important stake in the overall direction of our nation’s health care system. Although the economic crisis has overshadowed every other issue in the presidential campaign, health care remains a key concern of voters.

All the trends that have been driving health care toward a crisis are still headed in the same direction. Health care costs have perhaps moderated a bit, but they are still increasing faster than inflation — and are still on track to consume 20 percent of U.S. G.D.P. by 2015. The number of uninsured in the United States is nearly 46 million, according to the latest Census report.

I want to focus on one critically important aspect of health care reform: How do we balance short-term cost savings with long-term health?

Let me share with you my perspective. As Deputy Secretary of Health and Human Services, I oversaw all HHS programs and operations, including Medicare, Medicaid, regulation of food and drugs, medical research, and public health.

In my role at HHS, I often met with my counterparts in the health ministries of other countries, and I found that my position was unique. Like the others, I was responsible for the financing and delivery of health care. But my portfolio also included innovation — most notably, oversight of the National Institutes of Health and the Food and Drug Administration. Unlike my colleagues, I had to balance the goals of reducing costs and sustaining innovation. This broader perspective also helped me appreciate the potential for innovation to reduce costs, improve quality, and allay suffering.

As we struggle with the challenges of health care, a narrow focus on costs to the exclusion of innovation would be self-defeating. Pharmaceuticals provide some striking examples of how innovation can help us break out of the box we’re in:

The power of new cardiovascular medications in the past 30 years to prevent or delay heart disease already has eliminated the need for tens of thousands of costly surgeries and hospitalizations.

Other medicines have kept thousands of patients with mental illnesses from facing institutional confinement — both medical and correctional — for months or years, often at government expense.

Over the last 40 years, the use of medicines has cut in half the number of hospital admissions for 12 major diseases, and in the last 30 years, new treatments have cut the death rate from heart disease by 50 percent.

I’m all for greater efficiency in health care — and there’s plenty of room for improvement — but efficiency alone isn’t going to bridge the yawning gap between our health care demands and budgets. Instead, we’re left with a zero-sum game of rationing — unless we pursue innovation that changes the whole equation.

Tonight I want to discuss the balance and interplay of cost control and innovation in health care, and I’ll do so in terms of a concrete example — the promotion of generic drugs.

Wider use of generic drugs has been one of the few bright spots in health care spending over the past several years. The health care proposals of both presidential candidates include promoting increased use of generics, as well as creating a path for generic-like versions of medicines developed through biotechnology.

Generic drugs can have a significant impact on health care spending – but there’s an upper limit on that impact. Prescription drugs account for only 10 cents of every dollar spent on health care in the U.S., and this share has remained fairly consistent over time.

Consumers’ perceptions, however, are quite different. One reason is that typical health coverage in the U.S. requires consumers to pay a bigger part of their drug costs than they pay for other medical treatment. As a result, market research shows that consumers overestimate drugs’ share of health care costs. In fact, three-fourths of consumers think that drugs account for 40 percent or more of health care spending — four times their actual share.

That makes pharmaceutical companies an attractive target in the health care debate. But if generic drugs are the golden egg, pharmaceutical innovation is the goose … and this innovation can have a powerful impact on long-term health care costs and quality. So the way we promote generic use is crucial, because the wrong way could stifle that innovation.

The story of generic drugs goes back to a bill passed by Congress in 1984. But to make sense of that story, we first need to know about how new drugs are developed and how our system promotes development of innovative medicines.

Every important new medicine that has been commercialized in our lifetimes … including the examples I cited earlier … depended on the research and development of private-sector pharmaceutical companies. Such discoveries often draw on basic science developed by NIH and other government-backed researchers. But private pharmaceutical companies provide the investment in applied science necessary to translate basic research into medicines that can benefit patients. In 2007, U.S. biopharmaceutical companies invested nearly $59 billion in R&D, more than twice the total NIH operating budget. Pharma companies invest an average of over $1 billion to bring just one new drug to market.

I have seen both sides of this process. NIH was part of my portfolio in the government, and today I work for a company focused on developing new first-in-class or best-in-class pharmaceuticals. For the system to work, the private pharmaceutical sector has to be able to finance and recoup an enormous investment in a very risky venture. Here’s how it works:

Pharmaceutical research actually creates two innovation assets: a unique, patentable molecule, and a clinical data package that comprises the body of knowledge about the new molecule.

After FDA approval, the company has a new medicine that, if all goes well, it can market without competition for 12 years or so — although that window of opportunity has been shrinking. This is the critical period when the company can earn a return on its investment. Then, when the patent expires, generic versions can come in and take up to 60–80 percent market share in as little as a few months.

Before 1984, there were essentially no generic medicines in the U.S. Innovative medicines were protected in the market by an insurmountable barrier to entry — even after the patent expired. That barrier was the huge investment in clinical trials that potential competitors would have to make, to put together the data package necessary for FDA approval of their new products.

The Hatch-Waxman Act — officially the Drug Price Competition and Patent Term Restoration Act of 1984 — was intended to promote generics while maintaining financial incentives for drug innovation. Basically, Congress brokered a deal between innovative pharmaceutical companies and the incipient generics business.

On the one hand, Hatch-Waxman created the opportunity for generics to win FDA marketing approval by submitting so-called “bioequivalence” studies — showing that their product was the same as the FDA-approved drug — in lieu of prohibitively expensive clinical trials.

On the other hand, the Hatch-Waxman law provides for restoration of up to five years of patent term if doing so does not extend the patent term beyond 14 years from the date of FDA approval. It’s important to note that Hatch-Waxman only allows half of the time expended on human clinical trials to be eligible for patent term restoration and does not apply to any pre-human clinical trial activities — which today take over four years on average. So while Hatch-Waxman makes up some of the time when the patent clock is ticking during the FDA process, it does not restore all of the patent term lost in the lengthy, 10–15 year drug-development and approval process.

Fast-forward to today. Nearly a quarter-century after Hatch-Waxman became law, the United States leads the world in development of new medicines. The biopharmaceutical sector is a prime example of the knowledge-based industries that will drive prosperity and growth in this century. More than 500,000 Americans work in the biopharmaceutical industry, earning on average $72,000 a year — with another 2½ million Americans’ jobs dependent on the sector.

At the same time, Americans can get access — within a fairly well-defined time period — to low-priced generic versions of innovative medicines developed in the United States. It’s estimated that generics will account for more than two-thirds of all prescriptions written in the U.S. this year, and the price of generics, on average, is around 70 percent lower than that of branded drugs. A study by Express Scripts found that just the increase in generic use last year saved $5.2 billion for the 160 million commercially insured Americans. As a matter of fact, all the medicines that I use are generics.

In Europe, by way of contrast, governments set pharmaceutical prices that often underpay for innovative medicines and overpay for generics. In fact, generic prices are generally lower in the United States than in Europe, where price controls often have the effect of enforcing higher prices on generics and inhibit the entry of unbranded competitors. This is an issue I discussed many times with my colleagues.

In addition, the evidence suggests that price controls have stifled pharmaceutical innovation in other countries. Europe used to account for 65 percent of the world’s pharmaceutical innovation back in the 1960s and 1970s. Today, it has dwindled to less than 40 percent. The balance has shifted to the United States, contributing to the employment and income I cited a moment ago. Policy matters.

But we are facing problems in the U.S., too, and these problems threaten the viability of pharmaceutical innovation in this country. Low-price generic drugs that meet critical medical needs will never be available unless innovative medicines are created in the first place.

The first issue is a shift in balancing the benefits and risks of any particular new medicine. As a result of a growing focus on risk, the FDA is imposing more and more requirements for clinical information — both before and after the approval and launch of a new drug. Safety is, of course, a paramount concern, and we can debate whether the FDA is striking the proper balance between benefit and risk. But there is no doubt that these requirements are driving up the cost of innovation, dragging out the drug development process, increasing the chances that a new drug will never get to market, and decreasing the effective patent life of products. As the costs continue to increase, only about one in three new medicines that do reach the market generate enough revenue during their lifetimes to cover the average cost of R&D — let alone secure an appropriate rate of return for shareholders.

Another indication of the challenges facing pharmaceutical innovation is that just 19 new medicines were approved last year by the Food and Drug Administration. To put that in perspective, it’s the lowest number of new approvals in any year since 1983 — a quarter-century ago — when aggregate R&D spending in our industry was one-tenth of what it is today.

At the same time, pharmaceutical companies are dealing with the loss of patent protection for key products. In fact, $150 billion in annual sales of branded medicines will go generic over the next five years. To put this in concrete terms: since pharmaceutical companies typically invest about 18 percent of revenue in R&D, then this decreased funding for innovation represents the potential loss of as many as 27 new drugs each year — at a time when the FDA is approving only 19! I fear the consequences for human health in the decades ahead as this decreased R&D funding comes home to roost in fewer innovative therapies.

This is the context in which policy makers are considering possible changes to the current patent regime. As policy makers address the issues in our intellectual property framework, they face a dilemma: How do we strike the balance between making low-price generic medicines available today and sustaining robust pharmaceutical innovation for tomorrow? Let’s take a look at the issues:

First, delays in the FDA approval process mean that, by the time a patented molecule gets to market, there is less and less time and ability to recoup the R&D investment. We must find a way to provide a predictable period of market exclusivity after approval.

A second problem created by the current patent regime is that it creates disincentives for companies to develop new indications for a medicine that’s going off patent. Remember that the FDA approves a medicine only for specific uses, or indications. Gaining FDA approval for additional indications requires additional costly clinical trials. We do, in fact, routinely pursue new indications for products already on the market. But there comes a point in the patent life of a product when such clinical research is no longer economically feasible. And there is no incentive for generic producers to do this research.

Some medical scientists have theorized, for example, that the statins may have a role to play in fighting Alzheimer’s disease. Obviously, this could have tremendous benefit for millions of people. But generic statins cost a few dollars a month and have no market exclusivity. Who could finance the extensive clinical trials necessary to test this potential new indication?

Earlier, I said that pharmaceutical research creates two assets: the molecule and the clinical data package necessary for approval. There’s actually a third asset – the whole body of information about the use of the product — and that asset grows in value every year the product is on the market. The total value of many medicines actually grows over time as we add to this body of information.

The pharmaceutical company that initially gains FDA approval for a new drug is responsible for maintaining such information — in particular, on any adverse events associated with the molecule — even when it is produced by generic companies. But no pharmaceutical company can afford to test new indications for a drug that is already generic — or will be soon, regardless of whatever promising signals may be arising from late stage post-marketing surveillance. We need a regime in which the decision to invest in and develop new molecules or indications is made by scientists and doctors rather than patent lawyers.

A third issue is how to create a regime for streamlined approval of generic-like biological compounds – so-called “follow-on biologics” or “biosimilars.” How this plays out will be a major test of whether innovation can be sustained. Biologics are proteins — big and often very complex molecules. Sometimes they are naturally occurring molecules, but that doesn’t mean that they’re easy to discover or to produce.

Quite the contrary: Biotech products are often notoriously difficult and sometimes today even impossible to characterize and to replicate — as opposed to traditional small-molecule chemical compounds. In fact, the old adage is that biologics are not a product but a process. Biologics are hard to manufacture, and it is difficult to determine whether copy versions are as effective — and the potential harm to patients … from even slight variations … can be significant. So it’s vital that any new federal legislation includes rigorous, science-based validation requirements before biosimilar products are approved. And it’s just as important, from an innovation standpoint, to preserve incentives for the original developers of biotech products.

So, what should we do? We need to find a way to promote access to generics and follow-on-biologics while maintaining the ability to innovate.

The best solution, in my view, is to provide intellectual property protection to that second innovation asset — the clinical data package for the molecule.

We should create a mechanism that guarantees “data package exclusivity.” This means that, for a fixed period of time after FDA approval, a competitor cannot gain approval to market a copied version of a new medicine without independently repeating the R&D needed to establish that the medicine was safe and effective. Once the data package exclusivity period ends, the copied version of the new medicine can get approval with evidence that it is sufficiently bioequivalent to the original.

Such a regime has already been implemented in Europe, both for patented small molecules, which are developed through chemistry, and for biologics, or large molecules developed through biotech.

We believe in order to protect the massive investment in R&D for new medicines the effective exclusivity period should be somewhere between 15 and 20 years.

This is the length of time needed to assure that the revenue stream from selling a new medicine will be sufficient to pay back its R&D cost, to fund additional research to define its fullest and best uses for treating patients, and to avoid the current mess of patent litigation that results when the data exclusivity period ends before the key patents on the medicine have expired.

Congress is now crafting a law that will define the terms under which copied versions of biologics can get approved for marketing without repeating the work done by the innovator to get the original version approved. Two bills have been proposed that would provide at least 14 years of data exclusivity for biologics. As you will recall, 14 years is the maximum patent term available under the Hatch-Waxman Act. An adequate data package exclusivity will enable innovators to develop the best biologics, not just the biologics with the best patents … because a great patent does not necessarily make for a great product for patients..

This approach would provide certainty to potential innovators, and thus promote innovation, while creating a definite timeline for introduction of follow-on biologics — one that would coincide with the expiration of any significant patents that cover the medicine — and I believe that the same principle can be applied to generic versions of small-molecule medicines. In other words, it would balance the goals of innovation and cost containment — the holy grail I set out to find at the beginning of my remarks.

Let me make one last point on the value of pharmaceutical innovation:

In 2005, a Columbia University economist — Frank Lichtenberg — published a massive analysis of disease data and death rates from 52 countries — rich and poor — and correlated this information with data on the availability of new medicines. He controlled for income, education, and other factors. And what he found was that new drug launches account for 40 percent of the increase in life expectancy.

In other words: for every year that life expectancy has increased … five months can be attributed to new medicines.

If we’re going to get beyond today’s “health-care crisis” — with its enormous human and financial burdens — then it will depend on continued innovation in pharmaceuticals and across medicine.

We have to stop thinking of the health care crisis in terms of a zero-sum cost game in which generics are good and expensive new medicines are bad. Each has a role, and we must strike the right balance. If we get it wrong by focusing too much on the costs and risks of new medicines, the results of lost innovation won’t be immediately apparent, but they will be very real. Which of those medicines that won’t be developed could have treated Alzheimer’s disease or Multiple Sclerosis or cancer? And how do you put a price on that? Without innovation, we don’t get the benefits to health – and we don’t get generics or biosimilars either!

Generic medicines are a great legacy of innovative pharma companies. Long after patents expire and we’ve recouped our investment in a discovery, generic versions continue to help patients worldwide. Thoughtful reform of intellectual property protection for pharmaceuticals can help ensure that we will continue to benefit from this legacy.